Pre-election trepidation morphed into post-election market exuberance, in only the latest demonstration of the power of an over-liquefied market backdrop. Here in the U.S., the bullish imagination has been captivated by the Trump administration’s pro-growth agenda, with a focus on tax and health-care reform, deregulation and infrastructure spending. The DJIA this week added slightly to record highs.

Meanwhile, a decidedly less halcyon reality seems to be coming into somewhat clearer focus: Trump’s victory likely marks a major inflection point for global markets. Bond yields have shot higher, while inflation expectations are being reset. The U.S. dollar has surged, while the emerging markets have come under pressure. From U.S. equity and bond ETFs to international financial flows, “money” is sloshing about chaotically.

There’s an extraordinary amount of confusion throughout the markets. For over the past year I’ve posited that the global Bubble has been pierced. This view was in response to faltering EM, mounting Chinese instability, the collapse in crude and energy-related debt problems (from U.S. junk to global corporates and sovereigns). Especially in response to early-2016 global market instability, the Fed froze its baby-step “tightening” cycle, while the Bank of Japan and European Central Bank (and others) ratcheted up what were already desperate QE measures. In China, officials threw up their hands and set the Credit floodgates wide open.

Waning badly early in the year, confidence in central banking was rejuvenated by an audacious display of concerted “whatever it takes.” I believe history will view ECB and BOJ QE moves as dangerously misguided, while the Fed (again) failed to heed the lessons of leaving policy way too loose for too long. Forces that central bankers set in motion early in the year may have largely run their course.

These days it’s important to appreciate that the primary effects of monetary stimulus can change profoundly depending on prevailing market dynamics. Recall that the first (2009) QE basically accommodated speculative de-leveraging and a transfer of securities from troubled holders onto the Federal Reserve’s balance sheet. General inflationary impacts – within the securities markets as well as throughout the real economy – were muted. QE2 (late-2010 into 2011) stoked the powerful inflationary (“bullish”) bias that had evolved in bond prices and throughout the emerging markets. Concerted “whatever it takes” “QE3 and beyond” that unfolded in the second-half of 2012 threw fuel both on Bubbling global securities markets as well as China’s “Terminal Phase” of excess. The upshot has been only greater over-investment, over-capacity, asset inflation, inequitable wealth distribution and social tension. In many real economies around the world (notably Japan, Europe and the U.S.), consumer price inflation trended even lower.

Importantly, the predominant consequence from the 2016 QE bonanza was to spur global bond Bubbles to precarious speculative “melt-up” dynamics. Yields around the world collapsed indiscriminately to record lows. Japanese 10-year yields sank to negative 30 bps. German bund yields dropped to negative 19 bps and Swiss yields to negative 63 bps. Having issued bonds going back to 1693, UK Gilt yields dropped to a record low 52 bps. Few, however, benefited more than Europe’s troubled periphery. In one of history’s more spectacular asset mispricings, Italian bond yields sank to an incredible 1.05% and Spanish yields fell to 88 bps. U.S. Treasury yields dropped to 1.36%. Brazil (dollar) yields sank to almost 4%, with Mexican (dollar) yields below 3%.

There’s a major problem associated with destabilizing speculative “blow-offs:” They notoriously conclude with sharp reversals, catching everyone by surprise and unearthing all kinds of excesses and associated maladjustment. Coming in conjunction with mounting global anti-establishment fervor, political instability and President-elect Donald Trump, the current bond market reversal ensures uncertainty even more acute than normal: A historic bond market Bubble meets historic social, political and geopolitical uncertainty – not to mention uncharted territory with respect to global monetary policy and economic structure.

Trump policies notwithstanding, global economic prospects remain murky at best. Record stock prices more reflect expectations of winning the money game than an indication of a brightening future. And with air now being released from the Bubble, the best days for bond prices have passed. Especially in the era of king dollar, “money” is now fully expected to deluge the world’s premier asset class - U.S. equities.

Let’s ponder for a moment The Other Side of the Story. Surging global bond yields will entail enormous amounts of speculative de-leveraging. This has yet to become a major issue for the markets only because of the ongoing $2.0 TN of global QE. Yet in this post-Bond Bubble and Trump to the White House backdrop, QE is rather suddenly no longer the bond market’s best friend. QE instead only exacerbates flows into stocks and king dollar – and perhaps even real economies where a shift in inflation trends is already indicated.

So, it’s this confluence of surging bond yields, de-leveraging, unwieldy flows and the potential for inflationary pressures to take root that is now rocking Peripheries around the globe. Importantly, policy confusion and uncertainty are poised to become a pressing market issue. With central bank liquidity inflating Bubbles and exacerbating instability more generally (rather than propping up bond prices), will this speed up rate “normalization” in the U.S. and QE “tapering” especially from the ECB and BOJ? Inquiring markets will want to know.

U.S. Treasury yields closed the week up another eight bps to a 16-month high 2.39%, after trading up to 2.49% on Thursday. Higher global yields again weighed on EM. This week’s trading action saw the Argentine peso drop 2.4% and the Brazilian real and Turkish lira fall 1.8%. All three of these Periphery economies have serious issues that will be aggravated by a tightening of global finance. Stocks were down 2.0% in Brazil, 2.5% in Argentina and 1.8% in Mexico this week. More noteworthy, EM yields made another leg higher. Local yields jumped 36 bps in Brazil, 27 bps in Turkey, 19 bps in Argentina, 15 bps in South Africa, 32 bps in Poland, 19 bps in Hungary, 11 bps in South Korea and 14 bps in China.

December 1 – Wall Street Journal (James T. Areddy and Lingling Wei): “Multinational companies are suddenly finding themselves in the crosshairs as China dials back its effort to turn the yuan into a global currency, alarmed that it has accelerated the flight of capital from its shores. In recent days, according to bankers and officials familiar with the situation, China’s foreign-exchange regulator has instructed banks to sharply limit how much companies move out of the country and into their other operations around the world. Until this week, it was possible for big companies to ‘sweep’ $50 million worth of yuan or dollars in or out of China with minimal documentation. Now, these people say, the cap is the equivalent of $5 million, a pittance for the largest corporations. Beijing is fighting an increasingly vicious cycle of capital outflows that weaken the yuan.”December 2 – Reuters (Samuel Shen and Engen Tham): “Bank of China, one of the country's ‘Big Four’ state banks, has begun to sharply limit corporate customers' ability to purchase foreign currency in Shanghai, in what sources said on Friday was a bid to help stem capital outflows and ease depreciation pressure on the yuan. Under the unwritten new policy, described by two sources familiar with the details, bankers at China's fourth-biggest lender began this week to discourage companies wishing to change yuan into dollars. Those firms which insisted on doing so were told they would be restricted to exchanging a maximum of $1 million… The policy comes as China's government adopts increasingly aggressive measures to control movements of yuan out of the country and snuff out expectations that the currency would continue to spiral lower.”November 30 – Bloomberg: “China added new restrictions on pulling yuan out of the country as authorities seek to prevent a flood of capital outflows from destabilizing the financial system. Officials won’t approve requests to bring the yuan overseas for the purpose of converting into foreign currencies unless applicants provide a valid business reason… The monetary authority has noticed funds are increasingly leaving the country as yuan payments… The equivalent of $275 billion exited the country via yuan payments this year through October, versus a $101.5 billion inflow in the same period of 2015…”Keep in mind that Chinese international reserves ended October at a more than five-year low $3.12 TN, this after peaking in June, 2014 at $3.99 TN. Policymakers are surely responding to what must be a surge of outbound flows. So-called “disorderly capital flight” is invariably a risk to an EM economy combating a faltering Bubble with loose finance and monetary inflation. Unprecedented annual Credit expansion of about $3.0 TN has thus far stabilized China’s faltering Bubble. But the issue then becomes an unstable currency as copious amounts of liquidity seek an exit. I would expect this week’s measures meant to slow outflows will heighten anxiety to get “money” out of China before more draconian controls are deemed necessary. King dollar and Trump uncertainty seriously complicate China’s financial and economic dilemmas.

And speaking of serious dilemmas, let’s not forget Europe. Italy’s political referendum will take place Sunday. Prime Minister Matteo Renzi has threatened to resign if voters don’t approve his plan for political reform. Between political opposition and a spirited anti-establishment movement, the vote is not projected to go Renzi’s way. But after sailing through Brexit and Trump’s win, there’s not a great deal of trepidation heading into Sunday. It is true that Italy is well-accustomed to political instability. Perhaps it’s complacency’s turn to be surprised.

The Italian banking system is a mess, and prospects for the Italian economy remain poor. Years of QE have done little to promote reform but a lot to inflate a Bubble in Italian debt (much of it held by Italian banks). It might be at least a year until Italian voters have the opportunity for voicing opinions on remaining in the euro. Yet in this unfolding uncertain global liquidity backdrop, it would not be surprising if the markets again begin pondering the long-term viability of the euro monetary experiment. The Germans and Italians sharing a currency forever? The Trump win has both emboldened Italy’s powerful anti-establishment movements and heightened Italy’s vulnerability to a deteriorating global financial backdrop.

Global financial conditions have begun to tighten – ominously, even in the face of $2.0 TN of ongoing global QE. While pretty clear in the near-term, intermediate and long-term QE prospects are really fuzzy. Heightened uncertainty now has “money” on the move, with associated instability an immediate issue for the fragile Periphery. Europe remains a global weak link, with their banking system at the heart of the continent’s fragility. Italian banks are the European banking system’s weak link. In this context, Italy’s Sunday referendum should not be taken lightly. In the event of a no vote and Renzi resignation, will political uncertainty (and capital flight) push Italy’s fragile banks over the edge? Recall 2012: Fears surrounding Italian banks and Italy’s long-term commitment to the euro over time escalated into fears of euro disintegration.

For Europe’s banks, it is now all about the politics. Italy voted “No” in a referendum that became a protest against the government and the restrictions of European Union membership.

To stop this drama turning into a crisis, eurozone politicians may have to allow Italy to use taxpayers’ money to shore up its sickest bank, Banca Monte dei Paschi di Siena.

This will be deeply uncomfortable because it lays bare the lack of trust in economic competence between eurozone countries and risks reviving fears about government exposure to local banking systems.

Those fears dogged the single currency five years ago. This time it is less a matter of survival—although many eurozone banks need more capital—than one of getting over the final hurdle of higher post-crisis capital requirements.

European banks’ very weak valuations illustrate how difficult and expensive it will be for some of the bloc’s largest lenders, like UniCredit and Deutsche Bank, to get the equity they need.

The first test is Monte dei Paschi. Italy’s “No” vote looks likely to derail its €5 billion ($5.3 billion)-capital raising plan because the uncertainty created by the resignation of Prime Minister Matteo Renzi will stop investors backing the deal—unless Italy can rapidly form a new, stable government.

On Monday, MPS’s bankers are trying to decide whether the deal will work.

If the bank fails to get funds from private investors, it will have to impose losses on bondholders to cover the capital it needs. That will mean some public money is used, because about half of MPS’s bonds are held by retail investors whose losses would be politically and economically painful.

Retail investors could be protected by a compensation scheme, or by Italy putting money straight into MPS in a precautionary recapitalization. This latter move is allowed under stiffer new European rules on bank bailouts, but only under certain conditions. The key one is that the money mustn’t cover known recent or likely losses, which is a problem at MPS because much of the money it needs is to fund provisions on bad loans that European regulators have demanded it takes.

There is however a financial-stability get-out clause behind most new European banking rules. That lets politicians get around the letter of the law when it threatens severe banking or economic turmoil.

This is where the politics counts. Turmoil for Italy would further provoke the anti-Europe feeling that has foiled Mr. Renzi. But allowing a bailout of the bank risks opening the door to public money being used elsewhere while eurozone governments are struggling to get their economies firing, keep voters happy and meet the bloc’s strict financing rules.

Italy’s largest lender, UniCredit, is waiting to launch a €13 billion-capital raising program and it isn’t alone among European banks in needing fresh equity.

A calming, technocratic administration in Italy could yet see MPS’s plan go ahead. If not, eurozone leaders will need to make some hard political choices—and quickly.

U.K.FTSE 100 £6,746.83 0.24%

GermanyDAX €10,684.83 1.63%

FranceCAC 40€4,574.32 1.00%

Global markets were not lacking in precarious unknowns. Italy just added another.

As voters on Sunday emphatically rejected constitutional changes aimed at accelerating reforms to the country’s moribund economy, they enhanced concerns that Italy’s banks could spiral into a disaster. They reinvigorated worries about the endurance of the euro currency and broader European economic integration. And they amplified the sense that Europe is a land of disappointing growth, political dysfunction and seething populism.

“Existential crisis” had not been on the ballot, but that was essentially the result. The lopsided tally against the reforms — nearly 60 percent rejected them — prompted the resignation of Italy’s prime minister, Matteo Renzi, leaving Europe’s fourth-largest economy without clear leadership.

As world markets absorbed the result, investors soured on Italian banking stocks. Shares in Monte dei Paschi di Siena, which was involved in Italy’s grandest banking fiasco, surrendered 4 percent on Monday on expectations that a private sector rescue devised by Mr. Renzi had been killed.

Investors initially pushed down the euro before it recovered. They cut the price of Italian government bonds, lifting the yield — a sign that investors will demand greater reward for the heightened risks of lending to Italy. Investors also unloaded Spanish and Portuguese government bonds, while buying German government debt.

The widening spread between lower-yielding German bonds and those issued by debt-saturated European countries amounts to a flashing indicator that investors see risks for the southern periphery. These market moves were muted because the results had been anticipated.

Indeed, for Europe and the rest of the world, this dynamic was uncomfortably familiar. For nearly a decade, the 19 nations sharing the euro have lurched from one crisis to the next, with no effective fix. A currency designed to unite the adversaries of World War II has instead generated fresh divisions — between creditor and borrower; Northern Europe and the Mediterranean.

In a year in which Britain voted to abandon the European Union and the American electorate selected Donald J. Trump as the next president, Italy offered its own contribution to the global populist insurrection. Against this backdrop, the basic contours of the world economy are now uncertain.

The British vote to exit Europe — Brexit, in common parlance — threatens to cleave the geography of the world’s largest single marketplace. The American elevation of Mr. Trump hands authority over the world’s largest economy to a man who has threatened a trade war with the second-largest, China.

The fall of Mr. Renzi creates an opening for the populist Five Star Movement, a party that seeks to free Italy of the euro and its strictures on government spending.

Even that possibility threatens Europe with trouble. If investors worry that Italy may leave the euro, they will demand greater rewards for continued lending. Those with the greatest debt burdens — Greece, Spain and Portugal — could see their borrowing costs rise beyond their ability to pay.

For now, such grim scenarios appear remote. The referendum maintains the power of the Italian legislature’s upper chamber, a potent check on the Five Star Movement, or any government pursuing radical change.

The most immediate consequences fall on the Italian banking system, now choked with some 360 billion euro, or about $385 billion, in suspect debts.

Mr. Renzi tried and failed to inject public funds into Monte dei Paschi, the perpetual locus of fears about an Italian-bred financial conflagration. The European Union, led by Germany, effectively forbade that step, citing new rules barring taxpayer bailouts to limit the temptation of bankers to engage in reckless lending.

“For Monte dei Paschi, it’s going to be extremely hard to close the capital raise by end of the year,” said Nicola Borri, a finance professor at Luiss Guido Carli University in Rome. “The political future is so uncertain.”

Most experts assume a caretaker Italian government will wind up seeking permission from European authorities for some form of a taxpayer-financed rescue of Monte dei Paschi, while agreeing to wipe out the investments of a thin slice of bondholders.

The consensus is that Italy can patch immediate holes in the banking system. But the referendum has destroyed what momentum existed to address the condition that is both cause and effect of the banking problem — a dire lack of economic growth.

Italy’s banks are stuffed with uncollectable debts in part because the country’s economy is smaller than it was a decade ago. Bad loans on bank balance sheets reflect that millions of people have lost jobs, eliminating spending power, while companies have seen sales evaporate.

Mr. Renzi pursued reforms aimed at spurring companies to invest. He made it easier for companies to terminate low-performing workers to eliminate a chief impediment to hiring them in the first place — the fear that giving someone a job was akin to adopting them as a dependent forever.

He sought to speed civil processes in the notoriously inefficient court system to make it easier for banks to recoup bad debts by collecting colateral.

The constitutional changes he sought were aimed at clearing another blockage to reform. They would have trimmed the powers of the upper chamber of the legislature, a place where proposals die.

Voters clearly did not trust Mr. Renzi to wield greater power. Now, they will be represented by someone with less power where it matters a great deal: Brussels and Berlin.

Debt-saturated nations in Europe have long argued that their burdens would be lighter if they could spend more money to spur faster economic growth.

But the European Union — anchored by Germany — has cited rules limiting the spending of member governments with big debts. Instead, Brussels and Berlin argue, such countries must deliver so-called structural reforms, stripping away labor protections and trimming pension benefits.

In a testament to the severity of this creed, German Finance Minister Wolfgang Schäuble effectively threatened to banish Greece from the euro if Athens did not deliver on reforms it promised as a condition of successive European bailouts.

“Athens must finally implement the needed reforms,” Mr. Schäuble told the Bild am Sonntag newspaper in an interview published on Sunday, a day before eurozone finance ministers convened to court the participation of the International Monetary Fund in the Greek bailout.

“If Greece wants to stay in the euro, there is no way around it.”

Mr. Renzi was a rare leader who carried credibility in such quarters. He gained modest relief from European spending strictures in part by pointing at his reforms.

“Renzi is the only leader in recent history who has advanced a structural reform agenda,” said Mujtaba Rahman, managing director for Europe at the Eurasia Group, a risk consultancy.

Now, Mr. Renzi is gone, along with his reform trajectory. What is most palpably still here is an Italian economy that is growing anemically, soon to be presided over by a caretaker government with a limited mandate.

“What chance does a less effective prime minister overseeing a caretaker government have of getting a hearing in Brussels and Berlin?” Mr. Rahman said. “It’s just not possible.”

Italy has no fuel for growth. It has no clear way to extricate itself — or the other parts of the planet connected to money — from the perils of its grinding banking crisis. And the one reinforces the other.

NEW HAVEN – Donald Trump’s economic strategy is severely flawed. The US president-elect wants to restore growth via deficit spending in a country with a chronic shortfall of saving. This points to a further compression in national saving, making a widening of an already outsize trade gap all but inevitable.

That dynamic unmasks the Achilles’ heel of Trumponomics: a blatant protectionist bias that collides head-on with America’s inescapable reliance on foreign saving and trade deficits to sustain economic growth.

The Trump administration will not inherit a strong and sound US economy. The pace of recovery since the Great Recession has been running at half that of normal cyclical rebounds – all the more disturbing given the massive size of the contraction in 2008-09. And savings, the seed corn of future prosperity, remain in woefully short supply. The so-called net national saving rate – the depreciation-adjusted sum of business, household, and government saving – stood at just 2.4% of national income in mid-2016. While that’s an improvement from the unprecedented negative saving position in 2008-2011, it remains far short of the 6.3% average that prevailed over the final three decades of the twentieth century.

This is important because it explains the pernicious trade deficits that Trump continues to rail against.

Lacking in saving and wanting to grow, the United States must import surplus saving from abroad.

And the only way to attract that foreign capital is by running massive current-account and trade deficits. The numbers bear this out: since 2000, when national saving fell well below trend, the current-account deficit has widened to an average of 3.8% of GDP – nearly four times the 1% gap from 1970 to 1999. Similarly, the net export deficit – the broadest measure of a country’s trade imbalance – has been 4% of GDP since 2000, versus an average of 1.1% over the final three decades of the twentieth century.

Trumponomics has the cause and effect behind this development backwards. It fixates on country-specific sources of the trade deficit, like China and Mexico, but misses the fundamental point that these bilateral deficits are symptoms of America’s far deeper saving problem.

Presume for the moment that the US closes down trade with China and Mexico – the first and fourth largest components of the overall trade deficit – through a combination of tariffs and other protectionist measures (including the proposed renegotiation of NAFTA and a Mexican-funded border wall).

Without addressing America’s chronic saving shortage, the Chinese and Mexican components of the trade deficit would simply be redistributed to other countries – most likely to higher-cost producers. The result would be the functional equivalent of a tax hike on beleaguered middle-class US families.

In short, there is no bilateral fix for a multilateral problem. The US had trade deficits with 101 countries in 2015 – a multilateral problem stemming from a saving shortfall that cannot be effectively addressed through country-specific “remedies.” That’s not to say that America’s trading partners should be let off the hook for unfair practices. But it does mean that there is limited hope for resolving seemingly chronic trade deficits – and the related erosion of domestic hiring traceable to these imbalances – if the US doesn’t start saving again.

Alas, this plot is about to thicken. Trumponomics seems likely to exacerbate America’s saving shortfall in the years ahead. Analyses by the Tax Policy Center, the Tax Foundation, and Moody’s Analytics all indicate that federal budget deficits under Trump’s economic plan are headed back toward at least 7% of GDP over the next ten years. Trump’s senior economic-policy advisers, Peter Navarro and Wilbur Ross (Trump's pick for commerce secretary), argued in a position paper in September that these estimates are flawed, because they don’t take into account “growth-inducing windfalls” from regulatory and energy reforms, or the added bonanza that should arise from a sharp narrowing of America’s trade deficit.

Indeed, the Navarro-Ross analysis attributes fully 73% of the growth-inducing revenue windfall of Trumponomics to a massive improvement in the overall trade balance over the next decade. Yet, as stressed above, barring a miraculous surge in national saving, this is highly dubious. Creative accounting, long a staple of supply-side economics, has never been more imaginative.

Therein lies one of the most glaring disconnects of Trumponomics. Getting tough on trade at a time when national saving is about to come under ever-greater pressure simply doesn’t add up.

Even the most conservative estimates of the federal budget deficit suggest that the already-depressed net national saving rate could re-enter negative territory at some point in the 2018-2019 period. That would put renewed pressure on the current-account and trade deficits, making it extremely difficult to reverse the loss of jobs and income that politicians are quick to blame on America’s trading partners.

Ironically, in the coming era of negative saving, the US will find itself increasingly dependent on surplus saving from abroad. If the Trump administration takes aim at major foreign lenders – namely, China – its strategy could quickly backfire. At a minimum, there could be an adverse impact on the terms by which America borrows from abroad; that could mean higher interest rates – hints of which are already evident – and ultimately downward pressure on the dollar.

And, of course, there is the worst-case scenario of an escalating global trade war.

Protectionism, anemic saving, and deficit spending make for an especially toxic cocktail. Under Trumponomics, it will be exceedingly difficult to make America great again.

America is not an ethno-state. That this needs restating is a sign of the times.

By William A. Galston

Candidates for U.S. citizenship take the oath of allegiance at the Justice Department in Washington, D.C., Nov. 17. Photo: Agence France-Presse/Getty Images

Half a century ago Congress enacted two transformative laws. The Voting Rights Act struck the political system like a lightning bolt. The other law, the Immigration and Nationality Act of 1965, has been like a time-release capsule whose effects build over time.It’s hard to say which has done more to change American society. But one thing is clear: During this election concerns about the consequences of our post-1965 immigration regime reached critical mass and found their voice. To be sure, the explicit critique focused on illegal immigration rather than the law itself. But it wasn’t hard to detect broader worries.A 2016 immigration survey by the Public Religion Research Institute and the Brookings Institution found that 21% of Americans say the prospect of the U.S. becoming a majority nonwhite country would “bother” them, up from 14% three years earlier. Among working-class whites, the figure was 28%; among Americans 65 and older, 29%.Fifty percent of all Americans acknowledged being bothered when they came into contact with immigrants who spoke little or no English, a figure that rose to 58% among seniors and 64% of white working-class Americans.These sentiments have an explanation—and a history. After decades of mass immigration from eastern and southern Europe after the Civil War, immigrants as a share of the U.S. population surged to nearly 15% early in the 20th century. In reaction, strong nativist and racialist movements emerged.When the U.S. economy lapsed into recession after World War I and fears of foreign-born radicals bent on domestic terrorism rose, the stage was set for restrictive immigration laws—the Emergency Quota Act of 1921, followed by the Immigration Act of 1924. These laws established caps on immigration from individual countries, which had the effect of reducing overall levels of immigration while virtually shutting down immigration from countries deemed undesirable. In the wake of these laws, immigration from Italy fell by more than 90%. Immigration from southern and eastern Europe, which represented about three-quarters of total immigration between 1900 and 1910, decreased to only one-third of the total during the 1930s.Despite some changes in the early 1950s, this restrictive immigration regime remained in place until the mid-1960s. Its consequences were momentous. Between 1924 and 1965, the immigrant share of the population fell to only 5% from 15%. Like the Germans and Scandinavians before them, “ethnics” from central and southern Europe were gradually assimilated into white America, a process that many scholars believe contributed to the relatively placid and consensual politics of the postwar decades. All else equal, homogeneity and solidarity are linked.During the past five decades, this process has been reversed. Since 1965, according to the Pew Research Center, immigration has increased the country’s foreign-born population from 9.6 million to a record 45 million in 2015. As a share of the total population, the foreign-born nearly tripled from 4.8% to 13.9%, approaching the peak reached a century ago. During this period, new immigrants, their children and their grandchildren constituted 55% of U.S. population growth. After transforming their ports of entry, the so-called gateway cities, they gradually spread to smaller towns with no history of demographic diversity.If current trends continue, Pew predicts, the absolute number of first-generation immigrants will rise still further in the next five decades, to 78.2 million, and the immigrant share of the population will surge to a record high 17.7%. Native-born Americans may not know these numbers, but they sense them, and many are troubled. The PRRI-Brookings survey found that 66% of Republicans and 77% of Trump supporters were bothered by encounters with non-English-speaking immigrants, compared with 35% of Democrats.As a country, we can and should place more emphasis on new immigrants acquiring English-language competence and on the process of civic integration. What we cannot do is halt, let alone reverse, the shifts in the composition of our population. Over the past five decades, the white share has declined to 62% from 84%.Even if we slammed the gates shut tomorrow, Pew demographers project, the white share would continue to decline over the next five decades to 54%. In my son’s lifetime, whites will become a minority. Indeed, their absolute numbers will shrink from today’s 200 million to 181 million in 2065.Whatever may have been the case in the past, today’s America does not belong to any single group. It belongs to anyone legally admitted to this country who in good faith pledges allegiance to our constitutional and civic norms.America is not an ethno-state. As our greatest president, Abraham Lincoln, reminded us, it is a nation “conceived in liberty, and dedicated to the proposition that all men are created equal.” It is a sign of our degraded times that it is necessary to restate what should be obvious to all.

The ideologically driven assault on the OBR’s sober professionalism is disgraceful

by: Martin Wolf

Robert Chote delivers the OBR's report on the UK's economic prospects on Thursday

The future is always uncertain. But sometimes it is more obviously so. A big question to be asked of the British government — and of Philip Hammond, the chancellor, in particular — is whether it is grappling with the uncertainties wisely.

The biggest worry is also the chief uncertainty: productivity growth. The Office for Budget Responsibility forecasts that rising hourly productivity could contribute 9.4 percentage points to overall growth of real gross domestic product between the second quarter of 2016 and the first quarter of 2022. This assumes stagnation will cease but also that lost potential output, relative to pre-crisis expectations, will never be recouped. The UK is, as a result, far poorer than was expected pre-crisis, as a Resolution Foundation analysis of the Autumn Statement explains: GDP per head is now expected to rise by a mere 6.8 per cent between the onset of the financial crisis and 2021. To make the future still more unpredictable, voters decided on Brexit. Virtually all forecasters believe this will have a negative short-term impact through reduced investment and immigration; and negative long-term impact through reduced openness to trade. The OBR expects immigration to fall and so the growth of aggregate GDP to be lower. It also expects weaker investment in response to greater un­certainty, slowing growth in the short term. It has ignored, however, the possibility that lower trade intensity would reduce productivity in the long term. Furthermore, it assumes any hit from uncertainty to growth would disappear quite soon.

Both assumptions are heroically optimistic. In particular, the UK’s new trading relationships are unlikely to be settled before the middle of the 2020s.Brexiters hate this message and so have decided to attack the messenger. But two points are worth bearing in mind. First, like any forecaster, the OBR has got things wrong in the past. But it has, if anything, tended to be too optimistic on future output rather than too pessimistic. Second, the OBR’s assumptions now put it among the more optimistic forecasters. The ideologically driven assault on the OBR’s sober and cautious professionalism is disgraceful. Mr Hammond was quite right to base his view of the future on these forecasts. But he was also wise not to respond with fiscal tightening in the short run. Indeed, he could (and should) have loosened further. It is sensible, given the uncertainties, to let public deficits and debt now take the strain. The UK is, happily, still able to do so. While the ratio of net public debt to GDP will be high by recent standards, it will remain below its average since the early 18th century. But to let borrowing take the strain, the chancellor had to abandon his predecessor’s fiscal rules. He did so with aplomb. His new rules provide substantial room for manoeuvre, should the outcome be worse than the OBR’s forecast suggests. That makes great sense. He might yet need all of it.The big question raised by the Autumn Statement concerns neither the forecasts nor the chancellor’s decisions on fiscal rules and the path of deficits and debt. It is whether the government is doing the best it can to dispel the clouds of uncertainty now hanging over the economy. The answer to that is: no. Two failures are particularly significant. First, it is absurd that we still have no idea what the government will be seeking in its negotiations over Brexit and the subsequent trading relationships with the EU and with other trading partners. This is the most important set of policy decisions to be taken by a British government since the UK entered the EU more than four decades ago. It cannot remain a state secret.

Second, the UK has to have an immigration policy that strongly supports economic dynamism. The crucial element will be to make skilled workers highly welcome — those here now and those to come. The UK economy cannot thrive without such people. This must be understood and loudly declared.The government also needs policies that are pro-prosperity and seen to be fair. While Mr Hammond’s productivity agenda is attractive in principle, it is far too small to offset the likely weakening in private investment. Moreover, despite all the rhetoric about “just about managing” households, the impact of tax and benefit changes announced in this parliament will harm those in the bottom half of the income distribution, especially the poorest decile, while planned rises in tax thresholds also favour the richest decile.The rhetoric looks cynical. That is perilous, especially when living standards are to take another hit. It would be better not to promise than to promise and not deliver.

A new report indicates that investors’ interests are inadequately safeguarded.

BANKS tend to grab the headlines when it comes to financial scandals and systemic risk. But many people have a lot more money squirrelled away with the asset-management industry, in the form of pensions and lifetime savings, than they do in their bank accounts. A new report* from one of Britain’s regulators, the Financial Conduct Authority (FCA), suggests that the industry is not doing a great job at looking after investors’ interests.The British fund-management industry is huge, with some 1,840 firms managing around £6.9trn ($8.6trn) of assets. With the ten biggest fund managers representing only around 47% of the market, competition ought to be pretty intense. But the FCA report finds that fees in the actively managed sector (ie, funds that try to beat the market by picking the best stocks) have barely shifted in the past ten years. Operating margins across a sample of 16 fund-management firms have averaged 34-39% in recent years, one of the highest of any industry. Profits that heady smack more of an oligopoly than of a cut-throat battle for business.There is one part of the market where fees have come down—passive, or tracker, funds that try to match an index. Their fees have fallen by more than half since the turn of the decade. Passive funds are gaining market share but not as quickly as you might expect. One reason may be the reluctance of financial advisers to recommend them. The FCA found that passive funds did not feature at all on the main “best-buy lists” of advisers before January 2014 and still comprise fewer than 7% of the funds on such lists.

The underlying problem, at least when it comes to retail clients, is that fund managers do not compete on price at all. Part of this is due to many investors’ ignorance. Remarkably, more than half of retail investors surveyed by the FCA did not know that they paid charges on investment products. Surveys show that many people are hazy about percentages or basic concepts such as compound interest.

Instead, fund managers seem to compete on the basis of past performance, with some 44% of retail investors saying this was an influential factor in picking a fund. Advertisements for funds often highlight the stellar returns previously achieved.

Launch enough funds (around 36,000 are available across Europe) and some are bound to be successful. Asset managers simply bury their failures. Of the equity funds available to British investors in 2006, only about half are still around in 2016; the others were merged or liquidated. As the report remarks: “This may give investors the false impression that there are few poorly performing funds on the market.”

In chasing performance, investors are pursuing a chimera. The FCA finds, like others before it, that active managers underperform the index after costs (see chart). And it finds little evidence of persistence in outperformance. It looked at the best-performing quartile of funds over the 2006-10 period and examined how they performed in the next five years. Just under a quarter stayed in the highest quartile, exactly what chance would suggest. More than one-third of the stars of 2006-10 slipped to a bottom-quartile ranking—or were closed or merged.It is hardly surprising that, if investors seem unconcerned by cost, charges stay high. But it makes a big difference to their wealth. Over 20 years, the FCA calculates, an active manager’s charges can eat up a third of an investor’s return.Each investment company contains an “authorised fund manager” board whose aim is to ensure that the fund meets its regulatory and legal responsibilities. But board members are employees of the firms they are monitoring and, the FCA notes, “generally do not robustly consider value for money for fund investors.”It is in the interest of asset managers for funds to grow as large as possible, since they earn a fee based on the size of the fund. There are economies of scale associated with managing a large fund but the report found that these savings were not passed on to retail investors. That is just one example of how no one seems to be looking after the client’s interests.All in all, this interim report points to a litany of failings in the industry. Yet the FCA’s suggested reforms—strengthening the duty of managers to act in the interests of all investors, for example—may turn out to be quite modest in scale. If this were any other industry (electricity generation, say) the public would demand more robust action. The FCA should wield a bigger stick.* “Asset Management Market Study: Interim Report”, November 2016. https://www.fca.org.uk/publication/market-studies/ms15-2-2-interim-report.pdf

New research shows how our brains make—and profit from—wandering thoughts

By Alison Gopnik

Like most people, I sometimes have a hard time concentrating. I open the file with my unwritten column and my mind stubbornly refuses to stay on track. We all know that our minds wander. But it’s actually quite peculiar. Why can’t I get my own mind to do what I want? What subversive force is leading it astray?A new paper in Nature Reviews Neuroscience by Kalina Christoff of the University of British Columbia and colleagues (including the philosopher Zachary Irving, who is a postdoctoral fellow in my lab) reviews 20 years of neuroscience research. The authors try to explain how our brains make—and profit from—our wandering thoughts. When neuroscientists first began to use imaging technology, they noticed something odd: A distinctive brain network lighted up while the subjects waited for the experiment to begin. The scientists called it “the default network.” It activated when people were daydreaming, woolgathering, recollecting and imagining the future. Some studies suggest that we spend up to nearly 50% of our waking lives in this kind of “task-unrelated thought”—almost as much time as we spend on tasks.

Different parts of the brain interact to bring about various types of mind-wandering, the paper suggests. One part of the default network, associated with the memory areas in the medial temporal lobes, seems to spontaneously generate new thoughts, ideas and memories in a random way pretty much all the time. It’s the spring at the source of that stream of consciousness.

When you dream, other parts of the brain shut down, but this area is particularly active. Neuroscientists have recorded in detail rats’ pattern of brain-cell activity during the REM (rapid eye movement) sleep that accompanies dreaming. Rat brains, as they dream, replay and recombine the brain activity that happened during the day. This random remix helps them (and us) learn and think in new ways.Other brain areas constrain and modify mind-wandering—such as parts of our prefrontal cortex, the control center of the brain. In my case, this control system may try to pull my attention back to external goals like writing my column. Or it may shape my wandering mind toward internal goals like planning what I’ll make for dinner.Dr. Christoff and colleagues suggest that creative thought involves a special interaction between these control systems and mind-wandering. In this activity, the control system holds a particular problem in mind but permits the brain to wander enough to put together old ideas in new ways and find creative solutions.

At other times, the article’s authors argue, fear can capture and control our wandering mind. For example, subcortical emotional parts of the brain, like the amygdala, are designed to quickly detect threats. They alert the rest of the brain, including the default network. Then, instead of turning to the task at hand or roaming freely, our mind travels only to the most terrible, frightening futures. Fear hijacks our daydreams.Anxiety disorders can exaggerate this process. A therapist once pointed out to me that, although it was certainly true that the worst might happen, my incessant worry meant that I was already choosing to live in that terrible future in my own head, even before it actually happened.From an evolutionary point of view, it makes sense that potential threats can capture our minds—we hardly ever know in advance which fears will turn out to be justified. But the irony of anxiety is that fear can rob us of just the sort of imaginative freedom that could actually create a better future.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.